EM FX was mostly weaker last week as the broad-based dollar rally continued. With U.S. data this week likely to confirm the Fed’s hawkish stance, we expect the dollar to continue gaining. EM FX is likely to feel the heat from higher global interest rates, and not just from the Fed. BOC and RBNZ are both expected to hike rates this week, while the ECB is likely to deliver a hawkish hold. Within EM, Israel and Korea are both expected to hike rates this week as the global liquidity backdrop continues to worsen.
Colombia reports February manufacturing production and retail sales Wednesday. Production is expected at 11.8%y/y vs. 15.1% in January while sales are expected at 8.7% y/y vs. 20.9% in January. At the last policy meeting March 31, the central bank delivered a dovish surprise with a 100 bp hike to 5.0% vs. 150 bp expected. The vote was 3-2, with the dissents in favor of 150 bp. However, the bank said that it needs to be cautious given the uncertainty. Swaps market sees the policy rate peaking near 9.25% over the next 12 months, down from over 10% prior to the March meeting.
Chile central bank minutes will be released Wednesday. At that March 29 meeting, the bank delivered a dovish surprise with a 150 bp hike to 7.0% vs. 200 bp expected. The bank noted more pessimism in consumer and business confidence and that activity is on a downward trend compared to last year. Looking ahead, the bank said that future hikes will be smaller under its base case scenario. Swaps market sees the policy rate peaking near 8.75% over the next 6 months, down from around 9.75% prior to the March meeting.
Czech Republic reports March CPI Monday. Headline inflation is expected at 12.4% y/y vs. 11.1% in February, If so, it would be the highest since May 1998 and further above the 1-3% target range. Minutes from the March 31 policy meeting were just released and "The Board assessed the risks and uncertainties of the winter forecast as being markedly inflationary, especially in the short run. These risks also required significantly tighter monetary policy, and probably for longer.” Next policy meetings is May 5 and another 50 bp hike to 5.5% seems likely, with odds of a hawkish surprise. Swaps market sees the policy rate peaking near 6.0% over the next 12 months, but we see upside risks still.
Turkey reports February current account data Monday. A deficit of -$5.30 bln is expected vs. -$7.11 bln in January. If so, the 12-month total would rise for the third straight month to -$23.1 bln, the highest since July 2021. IP will be reported Tuesday and is expected at 7.5% y/y vs. 7.6% in January. The central bank meets Thursday and is expected to keep rates steady at 14.0%. Inflation shows no signs of easing as PPI at 115% y/y inn March points to significant pipeline price pressures. At some point, we believe Erdogan will have to capitulate and allow the central bank to hike rates. Indeed, swaps market and Bloomberg consensus both see the policy rate starting to rise over the next 3 months.
Bank of Israel meets Monday and is expected to hike rates 15 bp to 0.25%. However, some analysts look for a bigger 25 bp move. At the last policy meeting February 21, the central bank made a hawkish pivot and said it would being tightening over the next few months. March trade data will be reported Wednesday. March CPI will be reported Friday. Headline inflation is expected at 3.7% y/y vs. 3.5% in February, If so, it would be the highest since June 2011 and further above the 1-3% target range. Swaps market sees the policy rate peaking near 2% over the next 24 months.
Russia reports Q1 current account data and February trade data Monday. The external accounts were in solid shape ahead of the Ukraine crisis but all bets are off now. Elsewhere, S&P cut Russia’s foreign currency sovereign rating to Selective Default. The agency said “The foreign currency downgrade follows our understanding that the Russian government made coupon and principal payments on its U.S. dollar-denominated 2022 and 2042 Eurobonds in rubles when those payments were due on April 4, 2022.” Russia was forced to do so after the U.S. Treasury halted dollar debt payments from being processed by U.S. banks. S&P added that “Although the default could be remedied under a 30-day grace period allowed under the terms and conditions of the bonds, we don’t expect that investors will be able to convert those ruble payments into dollars equivalent to the originally due amounts, or that the government will convert those payments within that grace period.”
China reports new loan and money supply data sometime this week. New loans are expected at CNY2.74 trln vs. CNY1.23 trln in February, while aggregate financing is expected at CNY3.55 trln vs. CNY1.19 trln in February. PBOC also sets its 1-year MLF rate sometime this week and is expected to cut it 10 bp to 2.75%. With the economy slowing sharply due to lockdowns, policymakers have made it clear that more stimulus is coming. March CPI and PPI will be reported Monday. CPI is expected at 1.3% y/y vs. 0.9% in February, while PPI is expected at 8.1% y/y vs. 8.8% in February. Trade data will be reported Wednesday. Exports are expected at 12.9% y/y vs. 20.9% in February, while imports are expected at 8.6% y/y vs. 19.5% in February.
India reports March CPI and February IP Tuesday. CPI is expected at 6.38% y/y vs. 6.07% in February. If so, it would be the highest since November 2020 and further above the 2-6% target range. The RBI just delivered a hawkish hold last week and is setting the table for an eventual rate hike. Governor Das stressed that “In the sequence of our priorities, we have now put inflation over growth.” Next policy meetings are June 8 and August 4. A rate hike is possible in June but we think August is more likely, which is consistent with Bloomberg consensus for Q3 liftoff. IP is expected at 2.8% y/y vs. 1.3% in January.
Singapore reports Q1 GDP Thursday. GDP is expected to grow 3.6% y/y vs. 6.1% in Q4. The Monetary Authority of Singapore meets on the same day. February headline inflation came in a tick higher than expected at 4.3% y/y vs. 4.0% in January, the highest headline reading since February 2013. While the MAS does not have an explicit inflation target, rising price pressures are likely to lead to another round of tightening this week. At the last meeting in October, the MAS tightened policy with an increase in the slope of its S$NEER trading band and we expect the same this time around.
Bank of Korea meets Thursday and is expected to hike rates 25 bp to 1.5%. However, nearly half the analysts polled by Bloomberg look for no move. At the last meeting February 24, rates were kept steady but the bank raised its inflation forecast for 2022 to 3.1% vs. 2.0% previously and for 2023 to 2.0% vs. 1.7% previously. Governor Lee took a cautious stance then and said that the Ukraine crisis was one of the factors considered by the bank. His successor Rhee Chang-yong has not been confirmed yet but he has sounded hawkish, recently noting that the BOK should use “rate signals” to encourage households to manage their debt profiles. Headline CPI came in at 4.1% y/y in March, the highest since December 2011 and further above the 2% target.